Brazilian
deforestation
Investor stewardship update
Graham Stock, EM Senior Sovereign Strategist
As we balance on the tipping point of pivotal global environmental shifts, the actions of countries beyond our home nations have become as critical as local concerns.
For those of us reading this article in the West, it has been relatively easy to turn a blind eye to the environmental troubles of Latin America as soon as our preferred nature documentary finished. But we’ve now reached crunch time. The climatic dynamics of the Amazon rainforest influence rainfall patterns as far away as the US. And with the Amazon being deforested at a rate of approximately 36 football fields’ worth of trees every minute, its loss is having a global impact.
With ESG principles embedded throughout our investment approach, the deforestation of the Amazon raises ethical, environmental and financial concerns for us. Biodiversity and climate change represent potential
systemic risks that can impact a country’s creditworthiness.
With nearly two-thirds of the Amazon being located in Brazil, high and increasing deforestation rates not only make the country less appealing as a sovereign investment on ESG grounds, they also impact its ability to harness its forestry assets in the future for positive sustainability and finance initiatives, such as carbon financing.
Ultimately, deforestation degrades Brazil’s creditworthiness and will likely cause deterioration in the price of its assets.
In June 2020, we began taking bondholder action. As co-chair of the Investors’ Policy Dialogue on Deforestation (IPDD), we got to work with 29 other investors with a total AuM of USD3.7 trillion to raise this issue with the Brazilian government. Our five outcome goals are:
Eight months into our role as co-chair on the
Investors’ Policy Dialogue on Deforestation,
Graham updates on why we’re taking
bondholder action to slow the rate of Amazon
rainforest destruction, what’s been achieved
so far and our action points for 2021.
Brazilian
deforestation
Investor stewardship update
A U T H O R Graham Stock EM Senior Sovereign Strategist P U B L I S H E D February 2021 R E A D T I M E 10 minutes
1. A significant reduction in deforestation rates. 2. The enforcement of Brazil’s Forest Code. 3. The ability of Brazil’s agencies tasked with
enforcing environmental and human rights legislation to carry out their mandates effectively and any legislative developments that may impact forest protection.
4. Prevention of fires in or near forest areas, in order to avoid a repetition of the fires seen in 2019.
5. Public access to data on deforestation, forest cover, tenure and traceability of commodity supply chains.
In the world of investor stewardship activities, our equity peers often take the lead when engaging with corporates, of which they are shareholders. But as established fixed income investors operating in the sovereign and
corporate markets, we were well placed to have our message heard by the right people.
What’s happened since June?
• Headline deforestation numbers for H22020 were disappointing. For the year, deforestation rates were up on 2019, although there are some positive indicators within the numbers. H2 2020 deforestation
For those of
us reading this
article in the
West, it has been
relatively easy to
turn a blind eye
to the
environmental
troubles of
Latin America
as soon as our
preferred nature
documentary
finished.
and fire rates were down in comparison to H2 2019 and the numbers for January 2021 show a particular improvement, suggesting a 70% decrease. While January is generally the quietest month for fires, we can nevertheless take the figures as a reasonable leading indicator on the basis that if deforestation is low at this time of year, there should be overall less material to burn when the peak fire season comes around in six-months’ time.
• Environmental law enforcement levels have not increased. The number of fines levied for environmental crimes in Brazil during 2020 continued to fall. Government officials have highlighted that this is a lagged indicator, as it takes years for prosecution efforts to make their way through Brazil’s legal system. However, there isn’t much evidence even at the initial level that enforcement efforts have
stepped up. We’ll be watching this point closely. • The Brazilian military is set to withdraw its
activities connected to deforestation efforts, with the role of enforcement reverting to the environment agency. We see this as good news. We are aware of a number of non-government organisations that are uncomfortable with the military’s role in this regard and it calls into question some of the larger issues with the government.
• Brazil’s proposed 2021 budget – which hasn’t yet been passed by congress – appears to reflect a cut for the environment agency, which is a concern, although until formally approved nothing is certain. We’ll be watching developments here closely too.
Progress vs expectations
Our goal is to raise awareness regarding
Our goal is to
raise awareness
regarding
deforestation
and to bring to
the Brazilian
government’s
attention the fact
that failure to
tackle this issue
represents a
systemic risk
for investors.
deforestation and to bring to the Brazilian government’s attention the fact that failure to tackle this issue represents a systemic risk for investors. Beyond the serious environmental costs, if the government doesn’t address this issue, Brazilian sovereign & corporate financing costs could go up.
Behaviour change at this level never happens overnight and we had anticipated a sizable lag between starting to take action and seeing tangible results.
In the first six months, we’ve exceeded
expectations regarding the level of engagement we’ve achieved. Our message is being heard across the political and central banking
infrastructure, meeting our need for engagement and awareness raising.
The IPDD’s membership has also broadened
to now include Brazilian financial institutions, curtailing the government’s ability to label us a foreign-only pressure group and push back on our goals.
Next steps
• Monitor 2021 cuts to the environment budget.
• Monitor enforcement levels and the shift from military enforcement to the environment agency.
• Develop an Indonesian workstream ¬– we formally added Indonesia as an IPDD workstream at the end of January, placing it on the same footing as the Brazilian project. We are worried about the impact of deforestation in Indonesia and want it to be clear that we are no solely targeting Brazil – this is a bigger issue to address.
To learn more
about our
approach
to ESG and
other industry
participation
initiatives,
click
here
.
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